Trade Tensions Prompt Supply Chain Changes in China

Date: Tuesday, January 8, 2019Source: Sourcing Journal

On Wednesday afternoon, Apple Inc. cut guidance sending its stock down 10 percent and the S&P 500 down 2.5 percent. CEO Tim Cook, in a letter to investors, cited trade issues, “We believe the economic environment in China has been further impacted by rising trade tensions with the United States.”

The following morning, Kevin Hassett, chairman of the U.S. Council of Economic Advisers, added to the China concerns in an interview with CNN stating, “the Chinese economy is slowing in a way that I haven’t seen in a decade.”

Bloomberg searched through conference call transcripts, from the second half of 2018, looking for companies that mentioned they were exploring manufacturing options outside of China as a result of tariffs and the trade war:

Enphase Energy, whose solar panels were subject to tariffs, spoke of the need to move manufacturing out of China at its analyst day in August. A month later, it announced an expansion in Mexico with contract manufacturer Flex.

“We are fighting for exclusion et cetera, but our strategy is pretty simple. We recognized the need to have contract manufacturing outside China. We are already proceeding towards qualifying Mexico. I have already invested the capital for that. I’m going to have manufacturing in Mexico in six months to nine months like what I said on the earnings call and those are actually happening as we speak”

On October 30, shoemaker Steve Madden reported it was aggressively shifting production out of China, and increased its target for non-Chinese production to 40 percent.

“First, we are aggressively shifting production out of China to other countries, primarily Cambodia. In 2018, we will source approximately 16% of our goods in the categories impacted by the tariff from countries other than China. On the last earnings call, I said we were targeting to increase non-China production in those categories to roughly 30% in 2019. That target has now moved up to 40% and potentially 50%.”

Arista Networks Inc., a maker of networking switches and other communication equipment, stated in its conference call on Nov. 1 that they were working to make their manufacturing operations and product sourcing less dependent on China.

Television-remote maker Universal Electronics mentioned it was shifting manufacturing to Mexico in its call on Nov. 8, citing rising labor costs and tariffs.

“On the plus side over the years, UEI has developed a supply chain that allows us a broad array of options for addressing manufacturing challenges such as tariffs, labor rate changes, labor shortages, dual sourcing, et cetera. As you are probably aware, we already have a manufacturing facility in Mexico and are well into the process of shifting certain skews to that facility. Frankly, we have been preparing for this shift because the increasing labor rates in China have made those labor rates less and less favorable over time to those in other countries”